A recent prominent case around a film scheme carrying tax avoidance advantages has clarified the law around what the authorities deem unacceptable ways of mitigating tax, lawyers at Withers say.

A recent high-profile ruling about the investment by a hedge fund manager into a film scheme helps to clarify understanding of how the UK’s tax authority views tax avoidance structures, lawyers at Withers say.

Recently, hedge fund manager Patrick Degorce's attempt to appeal a tax tribunal judgment against his investment in a film scheme failed, leaving him to pay £8 million in tax. 

"The outcome of this latest tribunal appeal is no surprise. HM Revenue & Customs is aggressively targeting film and other tax avoidance schemes and will fight hard against appeals. A large number of these schemes were sold to sports stars, celebrities and other kinds of individuals who could in no way be viewed as 'sophisticated investors'. We would suggest that these investors consider pursuing their advisors who sold them the schemes, as they will have professional indemnity insurance in place. The scheme promoters will, in most cases, have either disappeared or won't have the funds to pay damages,” Roberto Moruzzi, partner at Withers, said in a statement. 

The latest case centres on schemes purportedly set up to invest in films where losses are deliberately sought against which participants can offset tax bills, and where there is no clear attempt to engage in profitable economic activity. The saga also shows how while some forms of avoidance – such as those allied to structures such as Enterprise Investment Schemes – are seen as benign because they encourage investment in real business, others are tainted by their having no tangible underlying rationale. In recent years, there has been debate on whether lawmakers have blurred the distinction between tax evasion and avoidance, making legitimate tax planning more difficult.

Degorce, chief investment officer at Theleme Partners and co-founder of The Children’s Investment Fund (created by investment activist Sir Chris Hohn), was, so tax officials said, involved in a case stemming from a probe by HMRC into his income tax return for the 2006-2007 financial year (source: Financial Times, Independent). HM Revenue & Customs said Degorce sought to offset profits from his hedge fund through a film scheme, marketed by Goldcrest Pictures Limited, that has been associated with films including Chariots of Fire and Gandhi. It said Degorce bought the rights to two feature films — Tropic Thunder, produced by Ben Stiller, and Love Guru, written by Mike Myers — for an artificially inflated figure of £21.9 million, but only paid in £4.8 million of his own money. It claimed he then sold the rights back to Goldcrest for a fraction of the inflated price, saying the difference was a trading loss. 

With film schemes, the claim of them being a scam was that if a person invested into a scheme, then the investor would be ranked so far down the list of creditors that in the event of a failure, the investor would receive nothing. There is no clear pursuit of a profit in such a scheme, or intention to go after it, Moruzzi told this publication.
 
There are acceptable forms of avoidance, where structures are set up to encourage investments of some kind and have been encouraged by governments. The problems arise when accountants and others set up schemes on top of these structures where there is no real intent to invest in such activity, or where money is shuffled around, he said.
 
Another issue that arose is that some of the investors affected in the case covered by the tribunal were sports figures and entertainers, who were not the kind of "sophisticated investors" for which, under official rules, such schemes are suitable.